China entices savers to cross risky Rubicon
HONG KONG, May 20 (Reuters Breakingviews) - The People's Republic has just entered a new era: on Tuesday, one-year bank deposit rates dipped below 1% for the first time ever. As a consequence, savers may shift more of their record 160 trillion yuan ($22 trillion) parked there into stocks, long a Beijing goal. But a murky economic outlook means the timing could be poor for individuals and lenders alike.
The cuts from five of the largest state banks, including Bank of China (601988.SS), opens new tab and China Construction Bank (601939.SS), opens new tab, came as the central bank changed its monetary policy to "moderately loose" from "prudent" for the first time in 14 years. On the same day, the central bank cut its benchmark lending rate as well.
Chinese deposit rates have been trending lower for years – they were at 3% a decade ago and above 10% in the 1990s. Seeing the one-year rate drop below 1%, though, may breach a psychological threshold for many savers. They have been squirrelling their cash away into bank accounts at a decent clip: in the 12 months to March, total household deposits rose 10.3%, according to the PBOC's latest quarterly report. That's 118% of 2024's GDP. Planners have long been trying to cajole savers to spend more. Of late, they have identified reflating, opens new tab stock prices as an effective way to shore up consumer confidence.
On paper, Beijing's push to get companies to pay higher dividends is an added incentive. The annual yield at large lenders like the Bank of China is close to 6%, for example.
Trouble is, maintaining that looks challenging. Banks' net interest margins and returns on equity have been falling thanks to rate cuts and weak credit demand. A drop in deposits will exacerbate the trend if it forces up funding costs.
More broadly, the $18 trillion economy has been flirting with deflation: the consumer price index has been hovering close to negative territory for more than two years. And the trade war instigated by U.S. President Donald Trump leaves a question mark hanging over the pace of growth.
Granted, Chinese stocks often aren't well correlated to the economy's underlying performance. But if policymakers had the luxury of being able to pick a moment to entice savers to ditch deposits for the stock market, now would be an unlikely choice.
The People's Bank of China on May 20 lowered the one-year loan prime rate by 10 basis points to 3% from 3.1%. It also cut the five-year LPR by the same margin to 3.5%.
On the same day, five of China's biggest state-owned banks cut the interest rate they pay on deposits by 15 basis points to 0.95%.
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